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8
Food Cost Implications and Market Effects

This chapter provides a description of methods and results of the committee’s analysis of the food cost implications of the recommended changes to the Meal Requirements. The effects of proposed changes in the market are also considered.

CHANGES IN AMOUNTS AND TYPES OF FOOD

A change in the Meal Requirements could have a major effect on the cost of food to School Food Authorities (SFAs) if there are large changes in the types and amounts of foods required by the standards for menu planning and the standards for meals as selected. Tables 8-1 and 8-2 show that there are substantial differences in the amounts and types of foods specified in the current and recommended standards for menu planning, especially with regard to fruits, vegetables, and whole grain-rich foods. The main difference in the current and recommended standards for meals as selected is the new recommendation that students select at least one fruit at breakfast and at least one fruit or vegetable at lunch. In addition, the recommended requirements effectively increase the recommended amounts of meat or meat alternate, especially for the elementary level. Many other factors also affect the cost and sources of foods in school meal programs. It was not possible for the committee to address all these factors in its analyses to evaluate the food costs, but relevant factors are discussed in the later section “Other Factors Affecting Meal Costs.”



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8 Food Cost Implications and Market Effects This chapter provides a description of methods and results of the committee’s analysis of the food cost implications of the recommended changes to the Meal Requirements. The effects of proposed changes in the market are also considered. CHANGES IN AMOUNTS AND TYPES OF FOOD A change in the Meal Requirements could have a major effect on the cost of food to School Food Authorities (SFAs) if there are large changes in the types and amounts of foods required by the standards for menu plan- ning and the standards for meals as selected. Tables 8-1 and 8-2 show that there are substantial differences in the amounts and types of foods specified in the current and recommended standards for menu planning, especially with regard to fruits, vegetables, and whole grain-rich foods. The main dif- ference in the current and recommended standards for meals as selected is the new recommendation that students select at least one fruit at breakfast and at least one fruit or vegetable at lunch. In addition, the recommended requirements effectively increase the recommended amounts of meat or meat alternate, especially for the elementary level. Many other factors also affect the cost and sources of foods in school meal programs. It was not possible for the committee to address all these factors in its analyses to evaluate the food costs, but relevant factors are discussed in the later section “Other Factors Affecting Meal Costs.” 

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 SCHOOL MEALS TABLE 8-1 School Breakfast Program: Current Requirements Compared to Recommendations for a 5-Day School Weeka Current Requirements Recommendations Grade Levels K–12 K–5 6–8 9–12 Fruit (cups) 2.5 5 5 5 Vegetable (cups) 0 0 0 0 0–10b,c 7–10d 8–10d 9–10d Grain/Bread (oz eq) 0–10c Meat/Meat Alternates (oz eq) 5 5 7–10 Milk (cups) 5 5 5 5 NOTE: oz eq = ounce equivalent. aRequirements and recommendations are for meals as offered for a 5-day school week. Re- quirements are minimum portion sizes based on the Traditional Food-Based Menu planning approach. bMust be enriched or whole grain. cRequirements call for two grains, two meats, or one of each. dAt least half of which must be whole grain-rich (i.e., meet the criterion in Box 7-1). SOURCE: USDA/FNS, 2008e. METHODS USED TO EVALUATE COSTS AND CHANGES IN THE COST OF FOOD FOR REPRESENTATIVE BASELINE SCHOOL MENUS Assessing the impact of changes to the Meal Requirements on the food costs of reimbursable1 breakfast and reimbursable lunch meals requires data on (1) the changes in the amounts and types of foods used when a representative (typical or average) meal is compared with the same meal modified to meet the Meal Requirements and (2) the prices of the individual food items used in each meal. Data from recent, nationally representative school surveys were used in establishing the representative baseline menus and the food costs used in this report. In overview, the committee 1. Selected a set of 12 representative baseline menus (each of which covered 5 school days) for the breakfast and lunch meals, drawing from menus available in the third School Nutrition Dietary Assessment study (SNDA-III) data, as described and illustrated in Chapter 6. The complete set of baseline menus included five school-day menus from each age-grade level for each of the two meals and for the two major menu-planning ap- proaches (food- and nutrient-based); 1 Reimbursablemeals are meals that meet the requirements outlined in the section “School Meals Program Overview” in Chapter 1.

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TABLE 8-2 School Lunch Program: Current Requirements Compared to Recommendations for a 5-Day School Weeka Current Requirements: Traditional Current Requirements: Enhanced Food-Based Approach Food-Based Approach Recommendations Grade Levels K–3b 4–12b 7–12c,d K–3b,d K–6b 7–12 K–5 6–8 9–12 Fruit (cups) 2.5e 3.75e 3.75e 3.75e 4.25g 5e 2.5 2.5 5 Vegetable (cups) 3.75 3.75 5 Dark Green NS NS NS NS NS NS 0.5 0.5 0.5 Orange NS NS NS NS NS NS 0.5 0.5 0.5 Legumes NS NS NS NS NS NS 0.5 0.5 0.5 Starchy NS NS NS NS NS NS 1 1 1 Other NS NS NS NS NS NS 1.25 1.25 2.5 Grain/Bread (oz eq) 8 (min 8 (min 10 (min 10 (min 12 (min 15 (min 9–10h 9–10h 12–13h 1/day)f 1/day)f 1/day)f 1/day)f 1/day)f 1/day)f Meat/Meat Alternates (oz eq) 7.5 10 15 7.5 10 10 8–10 9–10 10–12 Milk (cups) 5 5 5 5 5 5 5 5 5 NOTES: min = minimum; NS = not specified; oz eq = ounce equivalents. aRequirements and recommendations are for meals as offered for a 5-day school week. bMinimum portion sizes. cRecommended portion sizes under the Traditional Food-Based Menu planning approach. dOptional grade configuration. eTwo or more servings of fruit, vegetables, or both a day. fMust be enriched or whole grain. gTwo or more servings of fruit, vegetables, or both a day, plus an extra half-cup over the 5-day school week. hAt least half of which must be whole grain-rich (i.e., meet the criteria in Box 7-1). SOURCE: USDA/FNS, 2000a. 

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 SCHOOL MEALS 2. Matched food items in the 2004–2005 menus (from the school year when the SNDA-III data were collected) to food codes in cost data collected during school year 2005–2006 through the School Lunch and Breakfast Cost Study (SLBCS)-II (USDA/FNS, 2008f) and supplemented the cost data as described below; 3. Estimated the cost of breakfast and lunch meals for the representa- tive baseline menus using data from SNDA-III related to the percentage of each item that was selected by the students; 4. Revised a subset of the representative baseline menus2 according to the recommended standards for menu planning (see Chapter 7, Table 7-3) to produce modified baseline menus; 5. Estimated the cost of the food in breakfast and lunch meals for the modified baseline menus using estimated values for the percentage of each item that would be selected by the students; and 6. Compared the cost of the food in the set of six 5-day modified baseline menus to the subset of six 5-day representative baseline menus to assess likely effects of the proposed changes on food costs for reimbursable meals. The subset included the traditional food-based menus only. It is important to note that the representative baseline menus were se- lected to be “representative;” that is, neither better nor worse than existed at the time of the survey (school year 2004–2005). Although the process used to select the representative baseline menus involved selecting from a relatively large set of candidate menus, the variability of the menu items across schools meant that some of the menus selected for the representative baseline may have had costs that were higher or lower than the average. The committee modified the representative menus by changing some food items and amounts, but only to the extent needed to meet the recommended standards for menu planning. Thus, many of the foods (and food costs) remained the same. The availability of national-level cost data from the same period allowed the committee to take advantage of relatively recent information in assessing the cost implications of modifications that reflect the recommended changes. Matching to Cost Data The SNDA-III study has extensive information on the meals offered by school food authorities (SFAs) and on the foods actually served (selected by the students)—including the amounts of food, nutrients in the foods, and food descriptions. However, SNDA-III has no information on costs 2 The subset comprised six sets of menus (breakfast and lunch for three age-grade levels, each of which covered 5 school days) that had been planned using the existing traditional food-based method of menu planning.

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS or prices of the component foods. Data on the costs of specific food items from the SLBCS-II were recently released for an extensive set of food items used by SFAs (USDA/FNS, 2008g). Food items were matched at the level of food item code through a software application that was specially developed for the committee work (see Appendix K). Because the matching between the SNDA-III and SLBCS-II food items was not complete, it was necessary to develop additional food price information for food items included in the representative baseline menus and the modified baseline menus. When needed, estimates of the cost of food were imputed using similar products, component products (e.g., adding ingredients such as lettuce to a cheese sandwich), or (if needed in a very limited number of cases) 2005–2006 records from actual food service units. The 2005–2006 school year was considered the base period for analysis. Estimating the Food Costs of Menus For the representative baseline menus, the committee used information on each food item included, serving size (converted to grams), and cost (per 100 g) to estimate the cost per food item. The SNDA-III data on the repre- sentative baseline menus also include the number of servings of each food item and the number of reimbursable meals served for each of the menu days. To account for the percentage of the food items selected by students, a percent take-up was estimated for each food item based on the number of servings as a share of total reimbursable meals. The cost of each of the representative baseline meals as offered by the school was estimated using “offer” weights in the SNDA-III data.3 The food cost of the reimbursed meal was estimated using the estimated percent take-up values for each food item to weight the cost aggregated over all the food items served. For the modified baseline menus, the assignment of offered weights used the method employed in the SNDA-III study, which was based on a simple average of each of the required meal components. However, because student selection (take-up) rates cannot be known in advance of offering a meal, the method for the assignment of the rates used to estimate the reimbursed food costs required the use of assumptions. To consider the un- certainties about the assignment of take-up rates for the modified baseline menus, the committee conducted two analyses. The specific values used and the rationale for their use in the first analysis may be found in Tables L-1 through L-6 in Appendix L. Quality control measures were in place to ensure accurate data entry. 3 The SNDA-III offer weights were designed to produce a simple average of nutrient content (or, in this case, costs), assuming that meals included an average serving from each of the required meal components (milk, vegetable/fruit, meat, and grain), based on existing Meal Requirements.

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 SCHOOL MEALS For the first analysis of the reimbursed food costs, the committee as- signed take-up rates that reflected offer ersus sere (OVS) opportunities and expected student preferences (based on current patterns) as described below. In brief, the first analysis generated a set of cost estimates that as- sumed a moderate increase in student’s selection of fruits and vegetables. Table 8-3 indicates the approximate amount of change in the assigned take- up rates that were used in the first analysis, by food group. The take-up rates that the committee assigned for the first analysis were based on evidence from SNDA-III and on expert judgment from current school meal practitioners. However, the committee recognized that take-up rates for fruits and vegetables could increase substantially with very effec- tive implementation strategies. To address this possibility, the committee’s second analysis assigned take-up rates for fruits and vegetables that were substantially higher than those shown in Table 8-3. The rates that were used in the second analysis appear in Table L-7 in Appendix L. For both the representative and the modified baseline menus, the cost of the breakfast meal and lunch meal was estimated both by school level (elementary, middle, and high school) and aggregated across all school lev- els. The total aggregates across the school levels include total unweighted aerages (estimated with equal contributions from the three school levels) and total weighted aerages (with the meal cost values weighted by the TABLE 8-3 Analysis I. Change in Assigned Take-up Ratesa Relative to Rates in Data from the Third School Nutrition Dietary Assessment Study (SNDA-III), by Food Group Food Group Assigned Take-up Rates Compared with SNDA-III Data Fluid milk No change Meat/meat alternates No change Grains No change Fruits 50% increase at breakfast, no change at elementary or middle school lunch,a 50% increase at high school lunch over rates observed in schools that allowed 2 fruit servingsb Vegetables Comparable to rates for schools that allowed students to take 2 vegetables (an average of 1.1 to 1.3 servings of vegetables per child)c aActual take-up rates used vary with age-grade group and meal, but the changes are com- parable across the age-grade groups. Specific values used may be found in Tables L-1 through L-6 in Appendix L. bFruits are popular; average take-up rate used for both was 80 percent. cFurther increases in total take-up rates for vegetables were not assumed because the most popular vegetables (French fries, corn) are offered less often under the recommended standards for menu planning, and take-up rates for most other vegetables in SNDA-III were very low.

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS average number of meals served in the schools at each level, based on the distribution of meals in the SNDA-III study). ESTIMATED CHANGES IN FOOD COSTS FOR MODIFIED MENUS The estimated food costs of the complete set of representative baseline menus, the subset of food-based representative baseline menus, and the modified food-based representative baseline menus are shown in Table 8-4, along with the estimated percentage change from baseline. Cost of Food in Representative Baseline Menus Using elementary school lunch and the food- and nutrient-based rep- resentative baseline menus as an example, the food cost as offered by the school was $1.17 per meal, and as reimbursed (selected by the student) was $1.06 per meal. Over all age-grade levels, the average (weighted) lunch food costs as offered were higher ($1.26 per meal); and the average (weighted) lunch food costs as selected were lower ($0.98 per meal) when compared with the elementary school. For comparison, the average lunch food cost for meals served in the SLBCS-II national survey for the same period was $1.09 per meal when the unit of analysis was the SFA, and $0.98 when the unit of analysis was the reimbursable meal. Of note, the SFA-based analysis gives more weight to smaller school units. The estimated average baseline cost of the breakfast meal (the food- and nutrient-based baseline menus) was $0.60 per meal as reimbursed. This cost compares to the reference food cost of $0.73 per meal when the unit of analysis is the SFA and $0.65 per meal when the unit of analysis is the reimbursable meal. The average food costs for the representative baseline menu and reference SLBCS-II study confirm that the baseline menus are rep- resentative in food costs. The estimated food cost for the baseline breakfast meal is slightly lower than the reference value. Food Costs of Modified Baseline Menus Compared with Representative Baseline Menus The modified baseline food costs were compared with the appropriate baseline food costs as offered and as reimbursed. To evaluate the effect of the recommended Meal Requirements, the cost of the modified baseline menus was compared to the cost of the food-based representative baseline menu. The representative baseline menus were representative of both the types and amounts of food items offered by the SFAs.

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TABLE 8-4 Average Food Cost of Reimbursable Meals, as Reimbursed and Offered (2005–2006 dollar values)  Baseline Menus (food- and nutrient- Baseline Menus (food- Modified Baseline based menus)a* based only)a* Menusb Percent of Baseline n = 60 n = 30 n = 30 (food-based only) Cost of Meal ($) Cost (%) Meal Level Offered Reimbursedc Offered Reimbursedc Offered Reimbursedc Offered Reimbursedc,d,e Breakfast Elementary 0.67 0.64 0.74 0.72 0.81 0.69 108.3 95.6 Middle 0.59 0.58 0.53 0.50 0.81 0.65 151.5 130.9 High 0.70 0.59 0.54 0.56 1.03 0.82 189.0 146.2 Total (unweighted)f 0.65 0.60 0.61 0.59 0.88 0.72 145.0 121.3 Total (weighted)g 0.66 0.60 0.62 0.61 0.87 0.72 140.5 118.2 Reference, Unit of Analysis 0.73 SFAh** Reference, Unit of Analysis is 0.65 Reimbursable Mealh** Lunch Elementary 1.17 1.06 0.94 0.83 1.00 0.82 107.0 98.1 Middle 1.32 0.87 1.36 0.89 1.05 0.87 77.6 97.3 High 1.28 1.01 1.26 1.01 1.37 1.18 108.5 116.8 Total (unweighted)f 1.26 0.98 1.19 0.91 1.14 0.96 96.4 104.8 Total (weighted)g 1.26 0.98 1.18 0.91 1.13 0.94 95.4 104.0 Reference, Unit of Analysis 1.09 SFAh** Reference, Unit of Analysis is 0.98 Reimbursable Mealh**

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NOTE: See Appendix K for the number of meals used for weights. aRepresentative baseline menus selected from SNDA-III data, as described in Appendix L. bRevised versions of the food-based representative baseline menus, modified to be consistent with the recommended standards for menu planning. cThe term “reimbursed” refers to meals as selected by the students (meals as sered). dIf the number of food items served for each food is restricted to 100 percent of the number of meals offered, the food costs for breakfast increases to 120.4 percent of the baseline cost and the cost for lunch increases to 104.4 percent of the baseline cost for food. eIf the elementary school is restricted to no OVS, the cost of the elementary breakfast as selected increases to 112.5 percent of the baseline cost; the cost of elementary lunch as selected increases to 119.4 percent. Restricting the elementary meals to no-OVS leads to an overall (weighted) cost increase of 126.3 percent for breakfast and 110.8 percent for lunch. fThe estimated cost of elementary modified baseline menus differs between offered and reimbursed, but after rounding to two-digits, they are equal. The more limited selections at the elementary school level result in similar costs for the modified baseline menus. gMean food costs for meals across grade levels weighted by average meals served. hReference value from SLBCS-II (USDA/FNS, 2008f). SOURCES: *Represents costs for meals planned using only the food-based menu planning approach from SNDA-III (USDA/FNS, 2007a); cost of food items from USDA/FNS, 2008g. SLBCS-II costs were supplemented by those for similar foods and from food service records. Reference values for food costs, SLBCS-II Tables Exhibit D.8, D.9, D.11, D.12 (USDA/FNS, 2008f). **Represents reported costs of producing a reimbursable meal from the School Lunch and Breakfast Cost Study (USDA/FNS, 2008f). 

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0 SCHOOL MEALS Results of Analysis One Using the first set of assumptions about take-up rates, comparison of the food costs for the modified baseline menu with those of the representa- tive baseline menu for lunch and breakfast shows that, in general, the food costs increased significantly. The increase was most marked for breakfast: an average of 40 percent for the offered breakfast meal and 18 percent for the meal as selected (as reimbursed). One caveat, as noted previously, is that the food costs of the representative baseline breakfast menus were slightly lower (about $0.05 per meal) than the reference value taken from the SLBCS-II study. However, even accounting for this small difference (7 to 8 percent of the cost), the food cost of the modified breakfast meal is estimated to be higher. • The food cost of the modified elementary breakfast is quite com- parable to the baseline (modified is higher as offered, but not as selected). The increase in fruits is offset by decreases in the cost of other menu items. When the elementary students have no OVS option,4 the food cost of the breakfast would be 12 percent higher than the representative baseline level. Requiring elementary students to take more fruit servings would increase breakfast costs. • Food costs for the middle and high school meals are higher in the modified breakfast meals. The main reason for the increase in food costs at breakfast is the addition of a fruit serving and grain product servings (in- cluding whole grain-rich foods) for all levels, and of meat or meat alternates to meet the recommended standard for menu planning. • For lunch, there is some variability across the modified baseline food costs. Overall, the modified baseline lunch menus were slightly lower in food cost as offered (95 percent of the baseline) and slightly higher in costs as selected (104 percent of the baseline). Higher student selection of foods and increased costs for foods on the modified menu increased costs for meals as selected, especially for the high school menus. • The food cost for the high school lunch meal increased more than the cost of the elementary and middle school meals. The addition of more fruit and vegetables, more varied vegetables, and whole grain-rich foods (especially at the high school level) increased costs. The increase in costs at the high school level came despite offering starchy vegetables less often and a smaller amount of meat and meat alternates. The evaluation of the cost of food in the modified baseline menus indi- cates that offering menus consistent with the recommended standards for 4 In the case of OVS, the student is required to select the full amount of food.

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS menu planning is likely to increase the cost of the school meals, especially for breakfast. For the menus used in the analysis, the food costs for break- fast (as selected) increased up to 18 percent; for lunch (as selected), they increased by about 4 percent. Results of Analysis Two In the second analysis, take-up rates were assigned that assumed that students selected more fruits and vegetables. The increase in foods selected comes at a higher cost. There is no change between the baseline menus and modified baseline costs as offered because the menus themselves for this comparison do not change, only the student selection. When students select more fruits at breakfast, the food cost of the meal is significantly higher than the baseline values. With the assumption of increased fruits selected at breakfast, the elementary school breakfast food costs increase by 3 percentage points over the costs estimated in analysis one. For the middle school menus, the costs are 37 percent higher than the baseline (6 percent- age points higher than for the modified baseline cost that assumed lower take-up rates for fruits and vegetables). For the high school breakfasts, the overall increase is almost 52 percent higher than the baseline (and 6 per- centage points higher than for the modified baseline cost from analysis one). Overall, the breakfast food costs increase almost 5 percentage points over the modified baseline food costs for breakfast estimated in analysis one. For lunch, the changes are similar when the results of analysis two are compared with those from analysis one. The increased selection of fruits and vegetables increases the food costs of the middle school lunch by 3 percentage points and for high school by about 6 percentage points. The elementary lunch food costs increase by 5 percentage points. Overall, the lunch costs increase 5 percentage points over the cost increases of the modified baseline food costs that assumed lower take-up rates for fruits and vegetables. Summary of Changes in Estimated Food Costs of Modified Menus Table 8-5 summarizes the percentage increases in the reimbursed food costs of school meals under the two sets of assumptions for student take-up rates for the selected menus. Some of the estimated changes may be smaller than anticipated because the estimates are influenced by several factors, a selection of which is presented in Box 8-1.

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 SCHOOL MEALS • Level of competition for the business among distributors; • Student, geographical, or cultural food preferences; and • Variety of cooking and production methods (for example, onsite versus central kitchen with satellite sites, convenience heat and serve versus cooking from basic ingredients). School districts have the flexibility to change menus as needed depend- ing on market prices, availability of product, and other factors. Neverthe- less, the menus must meet the current Meal Requirements. When a major beef recall occurred in spring 2008, for example, SFAs quickly had to sub- stitute chicken or turkey for beef. The substitutions resulted in some cost variations and difficulties in meeting the Meal Requirement for iron. USDA manages the procurement of agricultural (food) commodities through the Agricultural Marketing Service (AMS) and the Kansas City Commodity Office of the Farm Service Agency. AMS purchases a variety of food products with the goal to stabilize the prices in agricultural com- modity markets. Fresh and processed foods customarily purchased under these programs include fruit and vegetables, beef and pork, poultry and egg products, and fish. The Kansas City Commodity Office purchases grain products including pasta, processed cereal, flours, crackers, ready-to-eat cereal, rice products, corn products, and miscellaneous dairy products; and it facilitates food distribution and multifood warehouse contracts. USDA Foods As mentioned in the bulleted list above, the use of USDA foods affects the food costs for SFAs. A per-meal rate for USDA entitlement foods is established by law, namely Section 6 of the Richard B. Russell National School Lunch Act. This law established a guaranteed rate of 11 cents per meal to be adjusted annually for inflation. The rate is applied to the num- ber of lunches served during the previous school year (USDA/FNS, 2008a). The rate published for school year 2009–2010 is 19.5 cents (USDA/FNS, 2009e). In addition, bonus products are made available to an extent that varies with the need to remove surplus products from the marketplace. The dollar value of the bonus products (about $17 million in fiscal year [FY] 2007) is much smaller than that of the entitlement foods (about $1.1 billion in FY 2007). The use of USDA foods reduces costs for school meal programs in the following ways: • The foods are provided at no cost (other than shipping and han- dling) to participating schools.

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS • The monetary value of the foods would be greater if bought on the open market, which increases the cost savings to the schools. The value of some USDA foods relative to the open market varies, however (CFPA, 2008). On average in school year 2005–2006, USDA foods accounted for 12 percent of the total food costs for SFAs (USDA/FNS, 2008f). For more than 60 percent of the SFAs, USDA foods accounted for at least 10 percent of total food costs. Some schools, however, do not use USDA foods at all (CFPA, 2008). When USDA foods are considered as a percentage of total reenue, however, the median is approximately 5 percent. This represents a substantial decrease since school year 1992–1993, when USDA foods ac- counted for 8 percent of total revenue (USDA/FNS, 2008f). USDA Fresh Fruit and Vegetable Program Additionally, the 2008 Farm Bill amended the National School Lunch Act to expand the USDA Fresh Fruit and Vegetable Program. Beginning in the 2008–2009 school year (United Fresh Produce Association, 2009), the program increased funding available for purchases of available fresh fruits and vegetables to all students throughout the day if more than 50 percent of their student enrollment in the NSLP comprised students eligible for free and reduced-price meals (Food, Conseration, and Energy Act of 00, P.L. 100-246 [June 18, 2008]: § 4304). Changes in Food Prices Relative prices have changed since the 2006 school year, as shown in Table 8-6; but price changes over the period are not uniform across all foods. The data used for the estimates of costs in the previous section come from the USDA Cost Study data (USDA/FNS, 2008f). This national survey was conducted during the 2005–2006 school year. Between 2006 and 2009, on average, overall food prices rose 12.2 percent. (The yearly average over this period is just over 4 percent.) Prices for food at home rose 12.1 percent, and prices for food away from home rose 12.4 percent during the 3-year period. Food prices reflect varying market conditions,6 however; and, in the 6 Agriculturalprograms and policies are among the factors that affect food prices, but the relative magnitude of the effects tends to be small and varies across foods. For example, farm subsidies and other agricultural policies in the United States have increased dairy and orange juice prices and decreased cereal, bread, and meat prices (Alston et al., 2006, 2008); and today they have little effect on sweetened products (Beghin and Jensen, 2008). Although changes in farm subsidies could have an effect on the relative prices of certain foods purchased

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 SCHOOL MEALS TABLE 8-6 Percentage Change in the Consumer Price Index for All Urban Consumers (May) Item 2006–2007 2007–2008 2008–2009 All Food 3.9 5.1 2.7 Food at home 4.4 5.8 1.5 Food away from home 3.3 4.3 4.2 Bakery products 4.6 11.1 6.6 Dairy and related 3.5 11.0 3.1 Fluid milk 7.5 10.2 –5.6 Eggs 29.6 18.2 –13.6 Meat 4.7 0.53 –17.8 Fruit and vegetable (F&V) 6.7 4.4 1.8 Fresh F&V 7.7 3.3 –4.1 Processed F&V 2.9 8.4 9.9 NOTES: Adjustment for 2007–2008 School Meal Programs was 4.272 percent. This percent- age change differs from the number for Food away from home reported here (4.256 percent) due to rounding. SOURCE: U.S. Bureau of Labor Statistics, 2008. 2007–2009 period, there was substantial volatility in food prices. For example, the cost of food at home increased 5.8 percent between 2007 and 2008 but increased only 1.5 percent between 2008 and 2009 (see Table 8-6). Between May7 2006 and May 2008, the prices of bakery items, dairy foods, eggs, and processed fruits and vegetables rose at a faster rate than did the prices of many other food items. Between 2008 and 2009, however, several types of foods fell in price. The prices of meat and eggs fell dramatically in the 2008–2009 period. The prices of processed fruits and vegetables increased at a rate faster than other foods during the latest two-year periods. Thus, in the current food environment, school districts must make significant adjustments to accommodate dramatic changes in price. For some years, they must make adjustments for rapidly rising costs for some key foods, such as eggs and meat. Other changes may also affect the costs that school units pay for food. For example, new foods and packaging continue to change costs. As these new food products are developed and made available in the market, the school food directors will weigh the full set of costs in selecting the food products. Changes in school procurement procedures also affect costs. In Minnesota, for example, the school districts that participate in a Joint by school food authorities, the magnitude of the effect is likely to be small and affected by a wide range of other government programs, including research and development funding and trade policies. 7 May is the month of adjustment for the School Meal Programs.

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS Powers Agreement have access to better purchasing power through the increased size of the buyer negotiating unit. This type of agreement can make purchasing more competitive for smaller districts or smaller states. Increased packaging (single serving units, for example) may increase the cost of the unit value to the school but may reduce waste and labor costs. Labor, Administrative, and Equipment Costs Several factors influence comparisons of the costs of the meals (not just the foods) that are provided under the current and recommended Meal Requirements. The major factors include changes in labor, administrative, and equipment costs. Aerage Costs Based on data from (USDA/FNS, 2008f), reported costs to operate the National School Lunch Program (NSLP) and the School Breakfast Program (SBP) include • food costs, about 46 percent; • labor costs, about 45 percent; and • other costs (supplies, contract services, and indirect charges by school districts), about 10 percent of the total cost. For the average SFA, the national mean reported SFA costs of produc- ing a reimbursable breakfast and a reimbursable lunch and the mean meal cost of the SBP and NSLP meals are shown in Table 8-7. The table does not provide data on the variability of meal costs, which may be substantial TABLE 8-7 Comparison of the Reported Costs of Producing a Reimbursable Meal, SBP and NSLP, by Unit of Analysis, 2005–2006 School Year SBP NSLP Type of Cost Mean SFA Cost Mean Meal Cost Mean SFA Cost Mean Meal Cost Reporteda $1.92 $1.46 $2.36 $2.28 Food $0.73 $0.65 $1.09 $0.98 Labor $1.02 $0.64 $1.05 $1.04 Other $0.17 $0.17 $0.23 $0.25 NOTES: NSLP = National School Lunch Program; SBP = School Breakfast Program; SFA = School Food Authority. aReported costs may not equal the sum of the component costs because of rounding. SOURCE: USDA/FNS, 2008f.

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 SCHOOL MEALS during a week or even within a year. It is important to note that reported costs include only those costs charged to the SFA budgets. The full cost of producing a reimbursable meal would also include costs incurred by the school district that support the SFA operations but are not charged (or re- ported) as costs to the SFA and, if applicable, transfers of local educational money to cover food service budget losses in excess of program fund bal- ance (USDA/FNS, 2008f). Using either unit of analysis (mean SFA cost or mean meal cost), the food and labor costs represented most (approximately 90 percent) of the average reported costs. Full costs, which include costs incurred but not charged to the SFA, are higher for both lunch and breakfast. The food costs and the associated reported labor and administrative costs shown in Table 8-7 have been used to provide a benchmark for esti- mated school meal costs. In addition, indirect costs for labor, equipment, and other items that may not be reported add to the cost of providing school meals. These indirect costs also have been investigated (USDA/FNS, 2008f) and used to determine the full cost of the meals. Importantly, con- siderable variation has been observed across SFA by size and other factors (USDA/FNS, 2008f). Although these costs are reported on the basis of average meal costs, ultimately, SFAs establish costs and resolve the reimbursement process at the end of a menu cycle and at the end of the school year. Hence, for plan- ning purposes, there may be considerable variability in costs on a specific day or week. Changes in the Distribution of Costs of Preparing Reimbursable Meals One possible approach to offering school meals that meet the recom- mended standards for menu planning is to introduce more on-site food preparation. This approach requires greater managerial skill, often requires substantial one-time investment in equipment, and most often would re- quire more skilled labor and/or training (Wagner et al., 2007). Such an ap- proach would be consistent with USDA’s new “Know Your Farmer, Know Your Food Initiative,” which has the goal of assisting school administrators to purchase more locally grown foods. An empirical analysis of data from 330 Minnesota school districts found that “healthier” meals had higher labor costs (for on-site prepara- tion) but lower costs for processed foods (Wagner et al., 2007). The authors call for funds to be made available for labor training and kitchen upgrades. They suggest that higher federal meal reimbursement rates may be unnec- essary (under the assumption that the meals do not cost more to produce because lower food costs offset higher labor costs). Opportunities for on-site preparation also influenced the choice of

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS foods to include in the modified menus. Successfully adhering to the recom- mended changes in the Meal Requirements may result in changes in indi- rect costs for labor, equipment, and other items that may not be reported. An overview of ways to control the cost of school meals is presented in Chapter 10. Student Acceptance Student acceptance of the meals and selection of the foods that are offered is an important consideration to the costs of meals and is reflected in the percent take-up of any specific food item. More generally, however, a change in the meal offered may induce more (or fewer) students to par- ticipate in the school meal program, as discussed in Chapter 9. Another possible effect might be the participation of more (or fewer) students who pay the full price of the meal. Changes in student participation in the school meal programs have not been addressed in the analysis of costs presented here. OVERALL IMPACT OF THE RECOMMENDED MEAL REQUIREMENTS ON THE COSTS OF SCHOOL MEALS The food cost analyses clearly indicate that the recommended changes in the Meal Requirements increase the cost of the food used in school meals. Because of the many variables involved, the committee had no practical way to estimate the impact of the recommendations on the full cost of the meals. The committee recognizes that, at current reimbursement levels, most school food authorities will be unable to absorb these increased food costs completely, even with better management. However, some might be able to do so if they have the capability to use fewer highly processed foods. Implementation of the recommended Meal Requirements likely will require some combination of higher federal meal reimbursement, a source of capital investment to cover initial costs of equipment, and additional money to train operators to prepare more food from basic ingredients. ECONOMIC IMPACT AND IMPLICATIONS FOR COMMODITY MARKETS The school meal programs represent a major buyer of the food supply in the United States, and changes to the programs hold the potential for sig- nificant impacts in agricultural markets. The SBP and NSLP represent half of all food costs spent on child nutrition programs (USDA/ERS, 2003). The current requirements for food-based menu planning and the recom- mended changes for breakfast and for lunch are summarized in Tables 8-1

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0 SCHOOL MEALS and 8-2. For the breakfast meal (Table 8-1), the recommendations provide for changes in the amounts of fruit, grain/bread products, and meat and meat alternates. Unlike the current requirements for breakfast, the recom- mendations determine that half of the grain/bread products should be whole grain rich (see Box 7-1 in Chapter 7 for the whole grain-rich food criterion). For the lunch meal (Table 8-2), the recommended menus include an aggregate increase in the amount of fruits and vegetables, with increased variety for vegetables, and an increase in the amount of grain products. Grain products include half whole grain-rich products. The changes presented in Tables 8-1 and 8-2 indicate that the school meal programs would increase their use of some foods, decrease the use of other foods, and have little change in others. In some cases, the composition of the food would need to change (such as the use of low-fat or fat-free milk in place of higher fat milks) in order to meet Dietary Guidelines. Table 8-8 provides values for an upper bound of assumed changes in the amounts of foods recommended by food type, for a 5-day school week, for the purpose of assessing market effects. These changes are based on the difference between the amounts of foods offered under the new recommen- dations and the amounts in the current requirements. Changes in amounts were estimated by assuming the current requirements to be represented in the average of menu plans (traditional food-based menus, nutrient-based and enhanced food-based) that is recorded by the SNDA-III data. For each food type, the change in the amount offered was calculated as the differ- ence between the recommended levels and the current (average) levels. Ad- ditional assumptions were used to distribute the food item over the more disaggregated types of food in the recommended menus. The amounts in the table represent an upper bound for weekly change because they are based on the standards for menu planning. In the large majority of schools that have OVS, the amount of each food that is actu- ally offered is based on the operator’s knowledge of the foods the students have selected in the past. (Under OVS, students are permitted to decline a specified number of food items—many do so, and this would be the case under the recommended menus as well. For more information on OVS, see Chapters 5 and 7, including Table 7-4.) Also, some schools had already taken steps to add fruits, a variety of vegetables, and whole grain-rich foods to their menus in 2004–2005. The changes in menus required to meet the recommendations would be smaller for these schools than for the average SFA. For the breakfast meal, the greatest change in foods is the increase in fruit, which doubles from the current requirement. If all students were to take only one fruit or fruit juice, the amount of fruit provided would still increase significantly from current practice. Grains increase significantly over current levels, with a shift to whole grains. For the lunch meal, the

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS TABLE 8-8 Upper Bound of Assumed Changes in Amounts of Foods Recommended by Food Type, for a 5-Day School Week, for the Purpose of Assessing Market Effectsa Changes to Amounts Recommended Food Group K–Grade 5 Grades 6–8 Grades 9–12 Breakfast Fruit (cups)b +2.5 +2.5 +2.5 Vegetables (cups) 0 0 0 Grain/Bread (oz eq)c +3.5 +3.5 +4 Refined Grain 0 0 Whole Grain +3.5 +3.5 Meat/Meat Alternates (oz eq)d +0–5 +0–5 +0–10 Milk (cups)e nc nc nc Lunch Fruit (cups) +1–2 +1–2 +3–4 Vegetables (cups)f,g,h +1–2 +1–2 +2–3 Dark Green (+) (+) (+) Orange (+) (+) (+) Legumes (+) (+) (+) Starchy (–) (–) (–) Other (+) (+) (+) Grain/Bread (oz eq) nc nc nc Refined Grain (–) (–) (–) Whole Grain (+) (+) (+) Meat/Meat Alternates (oz eq)i,j +1–2 nc –1–2 Milk (cups) nc nc nc NOTES: Weighted estimates of changes assume 48 percent of schools are traditional (food- based) planning; 52 percent other (nutrient based or enhanced). K = kindergarten; nc = no change; oz eq = ounce equivalent. aThe assumed changes were used to guide qualitative assessment of market effects. bThese are recommended amounts offered for breakfast. Under Preferred Option 1 (Ta- ble 7-4), student may decline one item, but must take one fruit or juice. cAssume, under current requirements, 12.5 percent of grains are whole grain or whole grain-rich foods for food-based planning, and 25 percent are whole grain or whole grain-rich for nutrient based and enhanced. This implies that, on average, 18.75 percent of the required grain items are whole grain or whole grain-rich (for each 5 ounces, approximately 1 ounce meets the whole grain target). dAssume 20 percent of increase is meat alternates (cheese, yogurt). eAlthough there is no change in the recommended amount of milk, the composition changes with milk choices limited to fat-free (plain or flavored) and plain low-fat (1 percent or less). Some reduction in milk may occur. fThese are recommended amounts offered for lunch. Under Preferred Option 1 (Table 7-4), the student may decline two items but must take one fruit or vegetable. gAssume the increase in fruits and vegetables is through 60 percent increase in fruits, 40 percent increase in vegetables. hIncrease in vegetables to meet the requirement of increased variety in vegetables at the same time as a reduction of starchy vegetables. iAssume 20 percent of increase for K–5 is meat alternates (beans, cheese, yogurt). jAssume 20 percent of decrease for high school is meat alternates (beans, cheese, yogurt).

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 SCHOOL MEALS largest change is the increased offering of fruits and vegetables, an increase of nearly four half-cup servings a week. Although it is not known what choices students will make if allowed to decline two foods but required to select at least one fruit or vegetable, SNDA-III data suggest that they will be more likely to select fruit. The increase in vegetables involves an increase in the variety of vegetables and a reduction of popular starchy vegetables such as white potatoes and corn. The increase in foods offered through the program can have im - portant effects on some markets. Based on a review of the literature, Hanson (USDA/ERS, 2003) estimates that the NSLP generates an addi- tional 45 percent of food consumption and that the SBP generates an ad- ditional 73 percent of food consumption—that is, the value of added food consumption generated by a program after netting food that would have been consumed anyway (USDA/ERS, 2003). For the school meal programs, about half of those additional food expenditures come directly from farm production (cash receipts). The amount and percentage of change noted in Table 8-8 suggest that the greatest changes will be for increased fruits and vegetables. Buzby and colleagues (USDA/ERS, 2006) review similar implications for U.S. agricultural markets that would arise from the adop- tion of Dietary Guidelines in current consumption patterns. For fruits and vegetables, the effects are likely to vary by production region, with fruit production more highly concentrated in a few states (e.g., California, Florida, Washington) and vegetable production more widely dis- persed. The consumption of fruits and vegetables has been increasing over several decades. Much of the national demand for fruit has been supplied by increased imports. The comparative advantage of increased domestic production of fruit, especially in the variety preferred by school age chil- dren, is limited by land and water availability as well as climate (USDA/ ERS, 2006). Hence, increased demand for fruit is likely to face continuing higher prices. Increased vegetable and legume production faces fewer limita- tions on acreage and, hence, on expanding domestic supplies. The major impact on grain markets is the shift from refined grain prod- ucts to whole grain-rich products. Although the range of options available for whole grains includes oats, brown rice, and other grains, most of the change is likely to come with the development and use of additional wheat products made with whole grain. Whole grain products use somewhat less grain ingredient than do refined grain product (less diverted through mill- ing) (USDA/ERS, 2006), but the slight increase in grain product demand would likely offset the small losses from changes in milling. Of greater con- cern is the relative lack of available whole grain-rich processed products on the market and acceptable in the school meals program. Hence some cost increases would be expected for the less available processed whole grain- rich products in the market. Several new whole grain products are being

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 FOOD COST IMPLICATIONS AND MARKET EFFECTS introduced through the USDA foods program; over time, the availability of whole grain-rich products is expected to expand. Overall (across breakfast and lunch) relatively smaller changes in meat and dairy products were required by the recommended changes, which would suggest a more limited market impact on these sectors. However, the effort to offer students one meat or meat alternate daily at breakfast would imply some increases, especially for the meat or meat alternates. The school meal programs purchase large amounts of these products (USDA/FNS, 1998b). Although no change is expected in the amount of milk offered, the stricter limitations on the type of milk (to low-fat and fat-free varieties) and on saturated fat (shift to reduced-fat cheeses, for example) may put some upward pressure on lower fat milk varieties. However, demand for butterfat and cheese has remained relatively strong. As evidenced by the rapid rise in the cost of dairy products during the 2007–2008 period, the SFAs are vulnerable to dairy product price increases. One of the challenges to estimating the market effect of the school meal programs is determining whether the school meal consumption supple- ments the children’s consumption of certain foods (that is, increases their intake of those foods during the day) or substitutes for foods that may have been consumed at other times during the day. With supplementation, the market effects described above would be most strongly experienced. With substitution, there would be few market effects (this would occur, for example, if students who eat more fruit from school meals would eat less fruit at home). SUMMARY To examine the expected change in food costs of offering menus con- sistent with the recommended standards for menu planning, the commit- tee compared the estimated cost of modified baseline menus with those of representative baseline menus, using likely take-up rates for the modified menus. As expected because of increases in fruits, vegetables, and whole grain-rich foods, implementation of the recommendations is likely to in- crease the cost of the school meals, especially for breakfast. For the selected menus, the food costs for breakfast (as selected by the student) increased up to 18 percent and for lunch (as selected) increased by 4 percent in the first analysis, which assumed moderate increases in students’ selection. For the changes recommended, market effects are expected to be the greatest for fruits, both because of higher expected supplementation in the breakfast program and because of limited domestic production. Other increased demand in the more limited markets for whole grain products, lower fat options for processed meats and entrées, and lower sodium op- tions will present challenges to SFAs.

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